Restricted - F.R. Wachovia Corporation 2006 RISK ASSESSMENT Top Tier Institution: Wachovia Corporation Business Lines: General Bank Group (GBG) Corporate Investment Bank (CIB) Capital Management Group (CMG) Wealth Management Group (WMG) Central Point of Contact: Richard F. Westerkamp, Jr. Team Members: Stan Poszywak, Deputy CPC and Operational Risk John Beebe, Market Risk Nancy Stapp, Credit Risk Ryan Rehom, Interest Rate Risk and Liquidity Risk Jeremy Carter, Legal and Compliance Risk Jim Gearhart, Information Technology (IT) Kevin Littler, Financial Analyst Shared Support: Craig Frascati, Basel II Danny Elder, Market Risk Al Morris, Market Risk Ron Bertolini, Market Risk Kirit Chokshi, Fiduciary Risk Karen Craigmile, Operational Risk Phil Watts, IT Jeremy Caldwell, Principal Investing Steven Pesek, Payment Systems Risk Last Update: July 27, 2006 CONFIDENTIAL FCIC-134446 Restricted - F.R. Table of Contents page I. Institutional Overview 3 II. Risk Assessment Summary 20 Consolidated Executive Summary • Overall Summary Assessment of Inherent Risk 20 o Inherent Risk by Type • Overall Summary Assessment of Risk Management 23 o Risk Management and Controls o Risk Management by Type III. Detailed RAP Documentation 28 Credit Risk 28 Market Risk • Trading Book 45 • Banking Book 69 Liquidity Risk 83 Operational Risk 95 Legal and Compliance III IV. Risk Matrices and Institutional Overview Appendix Items 124 2006 Risk Matrices Appendix Items (Business Line Management) 2 CONFIDENTIAL FCI C-13444 7 Restricted - F.R. I. Institutional Overview Executive Summary Wachovia Corporation (Wachovia) is the fourth-largest financial holding company in the United States, formed by the 2001 merger of the former First Union Corporation of Charlotte, North Carolina and former Wachovia Corporation of Winston-Salem, North Carolina. Wachovia is a multi-state, multi-bank holding company with consolidated total assets of $542 billion as of March 31, 2006. Relative to its peers, its banking operations emphasize commercial lending with 55% ofthe $281 billion loan book being commercial loans. The corporation operates full service retail banking offices in fifteen states and the District of Columbia, making it the largest retail banking franchise on the East Coast and NO.3 nationwide in terms of deposit share. Strategically, it strongly emphasizes customer service quality and retention within the retail franchise and within its operation of the fourth largest domestic online bank. In addition, Wachovia has the third-largest full-service retail brokerage firm in the country with 4.4 million broker client accounts, 10,500 representatives and more than 700 offices in 49 states and in six Latin American countries. The extent ofWachovia's business diversification is further reflected by its position as one of the largest personal trust providers in the nation, the second largest bank seller of annuity products and a top-twenty mutual fund provider. The corporation's wealth operations are the fourth largest in its markets, based on assets under managements for clients with over $1 million. Corporate and investment banking activities place Wachovia in the top 3 for leveraged loan syndications and make it the leading U.S. CMBS loan contributor and master servicer. During 2005, the corporation successfully integrated the operations of South Trust of Birmingham, Alabama, which it acquired in 2004, and grew its consolidated assets by 6% over the year. For the full-year 2005, Wachovia posted revenues of$26.1 billion and eamed net income of$6.6 billion, representing a retum on average assets of 1.31 %. In January 2006, the corporation reentered the credit card market as a direct issuer and as of March 1,2006, it completed its merger with WestCorp and its subsidiary WFS Financial Inc. of Califomia. The merger with Westcorp makes Wachovia the ninth-largest auto finance lender and provides the corporation with a small retail and commercial banking presence in Southern California. The proposed merger with the $128 billion Golden West Financial Corp., scheduled for the fourth quarter of 2006, would make Wachovia the fifth largest bank in the Westem US and expand its geographic footprint to cover 55% of the US population. On an intemational basis, the corporation's presence is currently limited; however it has stated its intent to expand in Europe and Asia within those markets where it has strong competence domestically. Wachovia has a moderate inherent risk profile, satisfactory risk management and an RFI/C(D) rating for 2005 of 22212(2). In 2006, it has continued to make progress in addressing its main regulatory challenges in the areas ofIT infrastructure improvement, data center proximity risk, and BSA/AML compliance. Corporate Strategy As is the case with all large banking institutions, the strategic resources and competencies that Wachovia leverages today have formed through a series of historical mergers and acquisitions. Wachovia National Bank originally opened in Winston, North Carolina, back in 1879. In 1911, it merged with Wachovia Loan and Trust to form Wachovia Bank and Trust, which would eventually evolved into the Wachovia Corporation. First Union's roots similarly date back to the tum of the 20th century when Union National was established in Charlotte, North Carolina. In 1958, Union National merged with First National Bank and Trust Company of Asheville, North Carolina, forming First Union National Bank of North Carolina. Over the decades, First Union, through mergers with more than eighty banks and other companies, grew into a diversified financial service company. Today's Wachovia, as noted above, was formed by the 2001 merger of First Union Corp. and the legacy Wachovia. In connection with the merger, First Union changed its name to Wachovia Corp. In July 2003, Wachovia Corp. and Prudential Financial Inc. created a national retail financial advisory firm, becoming the third largest retail brokerage unit in the nation. In November 2004, Wachovia achieved further growth through the acquisition of SouthTrust Corporation, a $53 billion traditional banking organization based in Birmingham, Alabama. Wachovia's overarching corporate strategy is to strengthen and grow core activities within its established, diversified business portfolio with an emphasis on customer service and retention. The organizational structure of the four business line portfolio is described in detail in the next section, which also outlines the strategic value propositions of each business. Strategies are implemented within the business lines through merger cost savings, revenue growth strategies and expense initiatives. The merger integration of South Trust was successfully completed over the course of 2005. In September 2005, Wachovia announced the purchase of the intemational correspondent banking business of Union Bank 3 CONFIDENTIAL FCIC-134448 Restricted - F.R. of California and the further acquisition of AmNet Mortgage, the parent company of American Mortgage Network, a nationwide residential mortgage banker. Historically associated with conservative lending practices, Wachovia has also recently undertaken new revenue growth activities which have a higher risk / return profile. Its March 2006 acquisition of Westcorp and subsidiary WFS Financial significantly extends the corporation's presence within the auto lending and sub-prime markets. From January 2006, Wachovia reentered the credit card business as a direct issuer following the merger ofMBNA with Bank of America. During the second quarter of 2006, Wachovia will acquire American Property Financing, Inc., the leading agency multifamily lender in New York City. In the fourth quarter of2006 Wachovia is scheduled to merge with Golden West Financial Corp. of California, the second largest savings bank in the US. Golden West, the only AA rated thrift in the nation, is a mono-line, niche player in option-ARM products. In parallel with these growth strategies, Wachovia announced in January 2005, a strategic initiative to limit noninterest expense growth relative to revenues. The key themes ofthe initiative are end-to-end process improvement, staff efficiency and outsourcing / offshoring. Responsibility for achieving improvement targets is held at the business unit level and tracked within business unit performance. On a consolidated basis, the cash overhead efficiency ratio achieved 2005 was 57.96%, compared to 59.98% for 2004. Further details on the success of the expense initiative are given in the financial section below. The future prospects for the continued financial strength of the corporation remain good. Asset quality metrics currently remain very strong and the corporation has weathered interest margin compression better than its peers. Revenue streams are diversified with 47% of annual net revenues being in the form of non interest income. While Wachovia's business line mix, with its substantial broker dealer operations, leads to a typically higher overhead ratio than traditional banking peers, expense constraint remains a key focus of management. Organizational Structures, Business Line Strategies & Significant Activities Wachovia's business model revolves around four operational lines of business: the General Bank, Capital Management, Wealth Management and the Corporate and Investment Bank (CIB); the structures of which are described in this section. These four businesses are overseen by the parent financial holding company and centralized treasury, risk management, human resources, legal and information technology functions.